Funeral trusts aren’t as simple as you think


Q. My friend just passed away. About eight years ago he was in a coma and received Medicaid. About a year later he received Social Security Disability and Medicare. One of the conditions for Medicaid was to put his life insurance in an irrevocable trust to the New Jersey Funeral Directors Association. When he switched to Medicare he did not change the trust. There was $17,000 in the policy and the funeral director indicated that all the money would have to go to New Jersey. Can his mom request the state return the money to his estate?
— Trying to help

A. We’re sorry for your loss.

It is essential to understand how an Irrevocable Funeral Trust works for the purpose of applying for Medicaid.

A funeral trust is a life insurance policy that is used for funeral expenses, said Geraldine Callahan of Callahan Financial Services in East Hanover.

She said funeral costs are paid out first with excess funds going to the state. The life insurance policy is held in the trust, and the trust is both the owner and the beneficiary of the policy.

“It is important to note that a funeral expense trust is a permanent transfer of ownership rights; one cannot surrender, loan, receive a premium refund or change the face amount, so unfortunately in your situation no changes can be made to the policy,” Callahan said. “The state will receive the excess funds.”

Callahan said similar to most life insurance policies, assets in an Irrevocable Funeral Trust are kept safe from creditors – including Medicaid.

She said she assumes your friend would not have qualified for Medicaid, and maybe even disability benefits, had they not put the excess funds into the Irrevocable Funeral Trust. That’s because life insurance funded within a funeral trust does not count against a person applying for Medicaid because it would be inaccessible to the claimant, she said.

“Generally, for single individuals to receive financial assistance through Medicaid, they have to spend down all of their ‘countable’ assets to $2,000,” she said. “Funeral trusts are one of the best ways to reduce holdings without jeopardizing Medicaid rules.”

Email your questions to moc.p1553588432leHye1553588432noMJN1553588432@ksA1553588432.